Tens of Thousands of Approved Housing Projects at a Standstill Due to Cost Pressures

High-rise apartments are seen in the inner city suburb of Surry Hills in Sydney, Australia, on May 8, 2021. (Lisa Maree Williams/Getty Images)

Developers are putting a hold on approved residential housing projects because of surging construction costs at a time when Australia is expecting well over a million migrants within the next five years.

According to a new analysis by KPMG Australia, the plateau in property prices combined with about a 30 percent increase in construction costs in Sydney and Melbourne has prompted developers to shelve projects.

In New South Wales (NSW), by the end of March, almost 16,400 housing projects had been approved but not yet commenced. This is about 3,000 more than the same time last year.

The last time NSW saw this level of stalled construction was in 2019 due to the high vacancy rates at the time.

Meanwhile, in Victoria, over 10,000 approved dwellings have not begun construction, the second highest on record.

The majority of the shelved dwellings are medium to high-density townhouses and apartments, which are more sensitive to cost increases.

“Property developers are shelving projects because of soaring costs and lacklustre property prices. Some are even going bust,” KPMG urban economist Terry Rawnsley said.

“Both Victoria and NSW have increased demand for new dwelling approvals, but dwellings are far from materialising, due to significantly higher input costs and a potentially lower return on investment.”

Rawnsley believes that this trend is unlikely to reverse anytime soon, despite a slowdown in construction cost hikes.

Meanwhile, relatively more stable house prices in Queensland and Western Australia underpinned construction commencement levels. These two states also have less new medium to high-density housing compared to NSW and Victoria.

Property sale signage displayed in North Lakes in Brisbane, Australia on June 10, 2016. (Glenn Hunt/Getty Images)

It comes as modelling by the National Housing Finance and Investment Corporation (NHFIC), a federal agency tasked with improving housing outcomes, found that Australia is expected to fall short of 106,000 dwellings by 2027.

The shortfall will be the result of supply being unable to meet demand.

A combination of construction supply chain disruptions, a tight labour market, interest rates, and a sudden increase in population are factors holding back supply.

Since May 2022, the Reserve Bank of Australia has embarked on an aggressive monetary tightening policy, taking the official cash rate from the historic low of 0.1 percent to 3.85 percent.

As interest rates go up significantly, it has become harder and more expensive for developers to secure funding and kick-start new projects.

Interest rate hikes also affect developers’ ability to make a profit and thus reduce their confidence in expanding building activities.

Meanwhile, developers saw the cost of building materials rise by 14 percent throughout 2022.

While cost pressures have started to ease for some building materials due to supply chain improvements by the start of 2023, construction costs still exceed quantity surveyor estimates by 10-15 percent in many cases.

Meanwhile, Australia’s population has also seen a bump after the rapid return of overseas migration has led to a surge in housing demand.

Affecting Rental Market

Australia’s rental market has also been squeezed after potential home buyers, who were priced out of the market, and migrants also began competing for the limited number of available rentals.

Property researcher CoreLogic noted that in April, most capital city rental vacancy rates remain at near-record low levels (around one percent), well below three to five percent which is considered indicative of a balanced rental market.

Men work on a construction site, building new apartments in Melbourne on April 4, 2023. (Photo by William WEST / AFP via Getty Images)

The combined capital city’s annual rent increased by 11.7 percent in the year to April was a new record.

CoreLogic economist Kaytlin Ezzy noted that the strong growth in capital city unit rents reflects the strong demand coming from migrants and international students, who typically first choose units as their preferred dwelling to settle in.

“It’s unlikely there will be much in the way of relief for renters in the short to medium term, with the flow of migrants expected to remain high and rental supply expected to remain low,” she said.

“Given that the flow of new unit approvals has held below average since 2018, the rental market will likely continue to have supply issues over the medium to long term.”

Sydney and Melbourne continued to record the strongest growth in unit rents, highlighting the cities’ future housing shortfalls as Australia continues to welcome migrants.

Former Senator Eric Abetz said Australians are “rightly asking” where the required future housing stock will emerge from.

“Policy makers will need to tread carefully to ensure that resentment towards new arrivals does not develop as Australians see the housing situation worsen and witness firsthand the unsustainable pressure on infrastructure,” he wrote in The Epoch Times.

Alfred Bui contributed to this report.